Senate Proposal Seeks Separate Reexamination Track

Last year, I pointed out that the Central Reexamination Unit (CRU) had extra capacity since inter partes patent reexamination filings were abolished with the passage of the America Invents ACT (AIA) . And, given the adjudicatory mission of the Patent Trial & Appeal Board (PTAB), and the examination depth of the CRU, I recommended that perhaps there could be some joint cooperation between the entities to more effectively review amendments submitted in AIA trial proceedings. Specifically, I envisioned a “Motion to Reissue” that would extend the PTAB 12 month trial schedule another 6 months to allow for a truncated reissue proceeding. This reissue phase would be performed by the CRU with results returned to the PTAB within the 18 month trial schedule. In that same post, I recommended some other changes to the motion to amend process such as allowing claims be submitted in an appendix (since adopted by the Board) and a change to Rule 42.73(d)(3).

Examination of an amendment. Following institution, a patentee will have the option to request that the PTO examine proposed amendments to one or more claims on which the PTAB has institute review. The PTO will then examine any such proposed amendments for patentability, using the existing model for reexamination of issued patents. The original claim on which the IPR/PGR was instituted will remain under the review of the PTAB, and a request for amendment will not be deemed an admission of unpatentability.

Interaction between examination and IPR/PGR. The examination of proposed amendment(s) may not be stayed without the patentee’s consent, and the examination and the instituted IPR/PGR will proceed separately. In the context of examining a proposed amendment, however, the PTO shall consider documents from the relevant IPR/PGR, including the petition, the evidence, prior art and arguments submitted by the parties, the institution decision of the PTAB, and any final written opinion if issued during the examination of the request. This will allow the PTO to ensure that different outcomes do not occur for substantially-similar claims.

There are several problems with this proposal. First, unlike the PTAB proceeding which has a time limit, patent reexamination has a best-effort, or “special dispatch” brand of timeliness.  Assuming most such requests will be filed 3 months into a 12-month trial schedule, if the typical first action/final action system is used (as proposed), the reexamination track is likely to conclude second in time, and will be, necessarily, ex parte. (proposed legislative text here)

A dual-track system would be inefficient to say the least, not to mention, one-sided.  For such a proposal to make sense it would have to be integrated with the PTAB trial schedule, and provide an opportunity for a petitioner submission.  Rather than a petitioner submission, the proposal suggests providing an exception to 315(b) to allow for subsequent IPRs should any amended claims exit the reexamination phase. Inefficient

Presumably patent reexamination was selected over patent reissue as the scope of patent reexamination, and amendment controls, are akin to that used by the PTAB at present.  This makes some sense, my suggestion of a motion for reissue would avoid the need to change 315(b) as, if the reissue were successful, a new patent would issue. Also, fulsome patentability searches are absent in patent reexamination (where the submitted art controls); not so in patent reissue. The Senate proposal would seem to limit the art to that already of record. Thus it is not clear if a new search would even be done under existing reexamination practices.

Finally, patent reexamination or patent reissue are already options for patentees to file prior to a final written decision of the PTAB, and many patentees are doing exactly that. The fly in the ointment with obtaining claims this way is that if the final written decision comes first, as I pointed out a year ago, 42.73(d)(3) is the real problem.  The Senate proposal suggests changing this so that potential estoppel is dropped. The proposed language is:

37 C.F.R. 42.73(d)(3)(3) Patent applicant or owner. A patent applicant or owner will be precluded from obtaining in the patent challenged in the inter partes review, or any patent claiming priority therefrom, or with a common priority claim, a claim canceled under section 316(d)(1)(A) or a claim that is not patentably distinct over the prior art on the basis of which a challenged claim was finally refused.

Obviously, any claim obtained later would necessarily need to be “distinct” over earlier applied prior art as a matter of common sense.  So, 42.73(d)(3) as proposed, is essentially toothless. This is a far cry from the current text that estopps a patentee from obtaining claims after a claim refusal/cancellation that are patentably indistinct to the cancelled claims, as opposed ot the art. In my view, such a change is inevitable as this rule will create havoc on many valuable portfolios going forward. Stakeholders have yet to appreciate the true potential of this rule. 

In short, while these ideas could be salvaged to present an interesting hybrid solution, the PTAB has recently recalibrated amendment operations to moot many of the earlier complications.  This proposal, like many of the PTAB legislative proposals have been beaten to the punch by the PTAB’s own rule changes and informative decisions.

Board Finds Profit Motive Acceptable for IPR

While all hedge fund filings considered by the PTAB to date have failed on the merits (Kyle Bass is 0-3 & Ferrum Ferro Capital 0-1), today, the Board declined to outlaw such filings as a matter of policy.  In IPR2015-01092, 1096, 1002, and 1103, Patentee Celgene filed Motion for Sanctions against the Coalition for Affordable Drugs. Celgene sought termination of the IPRs on the basis that the use of the IPR mechanism for pure financial gain (short selling and other investment strategy) was repugnant to the Congressional intent for this alternative to patent litigation. Decisions on the merits of the Celgene petitions remain outstanding.
In rejecting the motion for sanctions, the Board explained (here):

Profit is at the heart of nearly every patent and nearly every inter partes review. As such, an economic motive for challenging a patent claim does not itself raise abuse of process issues. We take no position on the merits of short-selling as an investment strategy other than it is legal, and regulated. . .  .The Leahy-Smith America Invents Act allows a person who is not the owner of a patent to file a petition with the Office to institute an inter partes review of the patent. 35 U.S.C. § 311. This is in contrast to covered business method reviews, which require a party or privy to have been sued or charged with infringement of the patent. AIA, § 18(a)(1)(B). Accordingly, consistent with the proposition that Article III standing is not a requirement to appear before this administrative agency, we hold that Congress did not limit inter partes reviews to parties having a specific competitive interest in the technology covered by the patents.

While certainly a disappointment for Celgene and other hedge fund targets, given the poor track record of these attacks to date, it remains to be seen whether this business model will survive much longer.  For example, not a single hedge IPR has been instituted to date. With 30+ challenges now pending, if the success rate is 10-20%, the market will no longer be spooked by the mere filing of an IPR. In fact, such already seems to be the case, and rightfully so. I’ve maintained all along that killing a patent in the unpredictable arts is easier said than done.

Given each one of these IPR petition filings is, conservatively speaking, a $150k investment for any hedge fund, a 10-20% success rate would require a $1-1.5 million investment for every 1-2 IPRs instituted— a steep price.  Especially considering that any IPR that moves forward is 2-3 years away from a CAFC decision. Moreover, any hedge fund is unlikely to have Article III standing to even participate in the CAFC appeal. I just don’t see wild swings (even in a small cap stock) based upon this kind of track record and timeline.

If the current institution rate continues, these filings will dry up as the filings will be become non-events from a market perspective. 

Unfortunately, in the short term, the Bio/Pharma lobby will keep their favorite hedge fund, boogeyman.  The obvious fix for Congress is to add a standing requirement to IPR (currently proposed in some bills). Yet, such a control would cut off IPR as a due diligence tool to avoid litigation, which would be quite unfortunate for the vast majority of legitimate IPR filers.

Patentees Back Themselves Into a Corner at PTAB

Both patentees and challengers alike were displeased with inter partes patent reexamination prior to the America Invents Act (AIA). Inter partes patent reexamination was too slow to serve as a true alternative to litigation for patent challengers, and patentees argued the system was biased against them. In formulating the AIA Congress fashioned a replacement, Inter Partes Review (IPR).  The IPR statutes, not surprisingly, mandate speed, and include mechanisms directed to the perceived lack of fairness of the old reexamination model.

Patents in the Unpredictable Arts No Easy IPR Mark

Back in January of last year Kyle Bass introduced himself to the patent community through a series of brash, public pronouncements on a perceived lack of quality in drug patents. His stated intention was to “knee cap” drug companies by leveraging Inter Partes Review at the Patent Trial & Appeal Board (PTAB) to cancel, in his view, improvidently granted patents. My reaction to those pronouncements was to predict that it would be Mr. Bass that would be “knee capped” as invalidating patents in the unpredictable arts is easier said than done. This is because there is already a significant interest in cancelling such patents from a highly sophisticated generics industry.  If defeating such patents were that easy, generics would already be on it. For this reason, the vast majority of patents sucessfully challenged at the PTAB are in the predictable arts (i.e., electrical and/or mechanical).

Since that time, Mr. Bass has seen his first two IPR filings denied by the PTAB on technical grounds. (failure to prove public accessibility of the underlying prior art references). Earlier this week, the Board denied the third Bass filing on the merits. In this filing, Mr. Bass and friends took on a method of treating multiple sclerosis as claimed Biogen’s U.S. patent 8,399,514. In its decision, the PTAB essentially explained to Mr.Bass that an obviousness analysis, in the unpredictable arts, requires far more than an “obvious to try” rationale. (here).

Given his 0-3 record, and the impending sanction orders against Mr. Bass in his remaining IPR proceedings, the outlook is quite negative for this investment vehicle. The Board’s decision in the Biogen IPR is supportable on a variety of bases.  First, prior art in the unpredictable arts must be enabled for the particular use being claimed in the target IPR patent.  MPEP 2121 et seq.  Second, the prior art must provide a reasonable expectation of success in unpredictable arts for achieving the utility in the claimed invention.  MPEP 2143.02.  The “obvious to try” test, as employed in the predictable art arrangement subject to the KSR dispute, is limited to routine experimentation involving a finite number of techniques with predictable results.  Here there was no dispositive testing in the prior art that demonstrated the claimed utility of the lead compound for effective treatment of MS. (for a completely different take, see a spirited discussion from Gene Quinn of IPWatchdog)

In the unpredictable arts, especially drug formulations, tens of millions are spent on researching formulations and potential efficacy for a given research premise.  Early, research premises, are disproven time and time again—hence the high development costs in this industry and the critical importance of patents.  No definitive test results or studies for the subject compound were found by the PTAB in the Biogen petition.

I don’t detect any bias against Mr. Bass at the PTAB. Rather, I simply see the application of the law, as it is recognized in the unpredictable arts.  Demonstrating obviousness in the unpredictable art is just not that easy.  Suspecting that a given compound might have efficacy is far afield from demonstarting such was actually known, let alone then arriving at a therapeutically effective dosage.

Going forward, it is likely that we will see few (if any) decisions on the merits for Mr. Bass’s filings. In my view, the writing is on the wall. His use of agency resources to advance his investment vehicle, is sanctionable, and will result in his complete defeat at the PTAB. for all of these IPR filings.

A tough road lies ahead for Mr. Bass, don’t mind his limp.